Home Equity Highest in 20 years

A significant rise in equity is the major positive impacting on national real estate markets, according to a report by Performance Property Advisory.

Director David McMillan says the average LVR (Loan-to-Value-Ratio) across the nation is the lowest it’s been for 20 years, which means average Australian households have more equity in their homes.

Performance Property’s National Market Overview reveals that the size of home loans, relative to property values, peaked in 1999 with an average LVR of 77%. This has been generally trending downwards since then, reaching the 2016 level of 58%, compared to 62% in 2015.

“The downward trend and the current low LVR is very positive for market stability moving forward,” he says.

A key factor has been the general rise in home prices over the past few years, led by major increases in Sydney and Melbourne.

McMillan says the “moderately alarming” outperformance in house prices, relative to the rise in incomes, has been permitted to continue due to the rise of dual-income households, increased foreign investment, changes to Capital Gains Tax rules and the falling cost of debt.

“We see this as slightly negative for the overall health of the market,” he says. “The amount of debt we are taking on relative to the average income has been progressively rising. The average mortgage is just over four times the average individual wage and this is the highest it has ever been.

“As the multiple has been fairly flat over the last eight years, arguably this can be seen as a fairly neutral indicator. However we can’t escape the fact that it is at the highest multiple on record, therefore we feel it is slightly negative for the marketplace.

“Should this multiple continue on its current trend and move closer to five times, this could cause some vulnerability in the marketplace.”

Performance Property Advisory believes there has been “over-speculation” in the residential property market in the last five years. Between July 2014 and July 2015 investor activity was larger than home-buyer activity – the first time this has happened since the data began.

“The APRA changes kicked in July 2015 and we saw a dramatic decrease in investor activity, which is what we believe the market needed,” he says.

“On average, investors make up 36% of the marketplace but recently investor activity was at 46%, so it’s fair to say there is still some excessive speculation in the marketplace and buyers should be cautious.”

McMillan notes, however, that mortgage stress is neither getting worse or better, with a trend across the four banks is fairly flat. “This is fairly neutral for the market moving forward,” he says.